Loose lips sink … IR

The latest Wall Street scandal, an insider trading case against billionaire Raj Rajaratnam and his hedge fund firm Galleon Group, holds implicit warnings for investor relations professionals: Beware the aggressive trader seeking an informational “edge” to trade on, and never ever get in bed with a tipster.

Today’s Wall Street Journal (“Colleagues Finger Billionaire”) reports that, according to an SEC complaint, an employee at an investor relations firm that counts Google among its clients allegedly fed inside information on Google’s earnings to a Galleon tipster, then tried to collect a six-figure quarterly fee to keep providing tips:

In the case of Google, the SEC civil complaint said that a person the agency identified as Tipper A received information in 2007 about an impending earnings shortfall from an unnamed employee of Market Street Partners, a San Francisco investor-relations firm. The SEC complaint said that Tipper A provided the information to Mr. Rajaratnam and that Galleon executed trades designed to profit on a decline in Google stock, netting $9 million.

The SEC complaint said the informant at Market Street demanded $100,000 to $150,000 a quarter to keep supplying Tipper A with information, but Tipper A refused and the informant stopped providing tips.

Google declined to comment. Market Street said it hadn’t been contacted by any authority, adding that it fully supports the prosecution of insider trading and will provide any necessary aid in the investigation.

To me, the bottom line is careers ruined … credibility lost … and crime doesn’t pay. The source of the tip, the traders, any middlemen in between – all are tarnished. And IR takes a hit, right along with an allegedly crooked gang of traders.

Confidentiality and trust are the foundation of investor relations. They are the basis of a relationship between a company and its in-house IRO or outside IR consultant. There is no more basic rule of ethics in IR: Do not discuss material nonpublic information with anyone who is not an authorized insider in the disclosure process.

We’ll have to watch for more information on this case. The SEC allegation that a Market Street Partners employee sought six-figure payments for inside information goes way beyond an inadvertent slip of the tongue, although neither Market Street nor its employee has been charged in the insider trading case.

(Update: Reuters reports on Oct. 22 that Google has suspended the services of Market Street. A lawyer for the IR firm says it is cooperating with authorities and considering whether to pursue legal action against a former employee.)

Deliberate tipping for profit is an obvious criminal act. Accidental tipping probably is a greater danger for most investor relations professionals. The threat of sloppy handling of information leading to insider trading should be discussed more often – as a repeated warning – within companies and in the IR community.

It’s critical to maintain the bright line that separates public information from nonpublic – to talk about what’s public and keep lips sealed when it is nonpublic.

[…] information can be a professional, organized crime involving stock-market sharks, such as the Galleon hedge fund guys. But it can also be a temptation for fairly ordinary people: a secretary, an accountant, a doctor […]